20473

VAT – INPUT TAX – Appellant submitted a voluntary disclosure to recover input tax purportedly claimed by subsidiary company in error – subsidiary company liquidated soon after the voluntary disclosure – Appellant asserted that it paid for the materials the costs of  which were invoiced to it – satisfied that the supplies were made to the subsidiary company for the purposes of its business – Appeal dismissed

LONDON TRIBUNAL CENTRE

	SELBIX LIMITED  	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      ELIZABETH MACLEOD JP CIPM (Member)	  

Sitting in public in London on 9 October 2007

Amin Dedhar, Finance Director for the Appellant 

Suzanne Lambert, counsel instructed by the Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION
The Appeal
1.	The Appellant appeals against the Respondents’ decision to disallow a voluntary disclosure in the sum of £134,046.45. This amount consisted of input tax originally claimed by a subsidiary company, Selbix Joinery Limited.
2.	The disputed issue in the Appeal was whether the supplies upon which input tax has been claimed were made to the Appellant or Selbix Joinery Limited. 
The Hearing
3.	Mr Painter, managing director, Mr Dedhar, finance director and Mr Mooney, tax adviser, spoke for the Appellant with Mr Dedhar taking the lead. They produced a statement of case and bundle of documents on behalf of the Appellant.
4.	The Respondents called Mr Bruce, Senior Assurance Officer, to give evidence. Mr Bruce carried out assurance visits of the Appellant and handled the voluntary disclosure. The Respondents supplied a skeleton argument and a bundle of documents.
The Facts
5.	The Appellant was incorporated and registered for VAT on 16 August 1991 under the identity of Cordflow Limited with a trading name of Selbix. The Appellant’s principal business was the manufacture of shop fittings for high street retailers in the United Kingdom and abroad. In 2006 the Appellant employed 85 employees manufacturing from a workshop at 2 Crittal Drive, Braintree, Essex.
6.	In 2006 the Appellant went through a change of majority ownership and directorship with Mr Painter and Mr Dedhar joining the company as managing director and finance director, and between them taking a majority shareholding.
7.	Selbix Joinery Limited was incorporated on 17 November 1999 commencing trading on 1 December 1999 and separately registered for VAT. Selbix Joinery Limited was a wholly owned subsidiary of the Appellant.
8.	Selbix Joinery Limited operated its business from premises at Unit D, Frenbury Estate, Drayton High Road, Norwich. The Appellant held the business premises on Frenbury Estate under a sublease from Anglian Windows Limited. The accounts of Selbix Joinery Limited for the year ending 30 November 2000 revealed that it had expenditure of £132,653 for rent and services.  
9.	The Appellant was the sole customer of Selbix Joinery Limited, which would provide joinery products to the Appellant, such as wooden table tops. The Appellant would then finish the joinery products by incorporating metal fittings before selling them onto the Appellant’s customers.  The accounts of Selbix Joinery Limited for years ending 30 November 2000 and 30 November 2001 showed that it sold goods to the value of £1,558,623 and to the value of £2,636, 028 respectively to Selbix Limited.  The accounts of the Appellant for the year ending 30 November 2001  revealed a value of £3,278,772 for purchased goods from Selbix Joinery Limited which was some £600,000 more than the value of sales recorded in the accounts of Selbix Joinery Limited. 
10.	Mr Awho acted as the accountant for the Appellant and Selbix Joinery Limited informed the Respondents on 4 December 2000 that Selbix Joinery Limited manufactured stock on a long term roll-out basis for the Appellant and held the goods until the Appellant required them for their business. This meant that the point of sale for the goods of Selbix Joinery Limited could be random and infrequent. The present directors of the Appellant disputed Mr A’s account stating that Selbix Joinery Limited only manufactured goods when the Appellant had received a firm order for them. We prefer Mr A’s version because he was in situ at the time when Selbix Joinery was manufacturing. The present directors assumed control of the Appellant almost four years after Selbix Joinery Limited ceased trading. 
11.	Selbix Joinery Limited obtained materials from various suppliers. Selbix Joinery Limited, however, did not have the financial strength to secure trade credit from the suppliers. The Appellant ordered the materials for Selbix Joinery Limited on its own letterhead stationary. The invoices for the materials were made out to the Appellant  but were delivered to the premises in Norwich from which Selbix Joinery operated its business. Selbix Joinery Limited paid for the materials from its bank account. The Appellant, however, transferred funds to the bank account of Selbix Joinery Limited to enable payment of the supplier’s invoices. The Appellant and Selbix Joinery Limited held separate accounting records. The purchases from the suppliers were recorded in the cash book for Selbix Joinery Limited, which claimed the VAT incurred on the purchases as input tax.
12.	 In the year ending 30 November 2000 Selbix Joinery Limited received expenses and a cash sum to the value of £1,509,305 from the Appellant. The Appellant’s accounts for the year ending 30 November 2001 showed that the Appellant paid expenses and transferred cash to the value of £3,080,942 to Selbix Joinery Limited. The 2001 accounts for Selbix Joinery Limired recorded no figure for the expenses and funding received from the Appellant.
13.	 The accounts of Selbix Joinery Limited years ending 30 November 2000 and 30 November 2001 recorded respectively £571,418 and £930,100 for purchases and consumables under cost of sales, and £226,022 and £218,128 for wages under expenditure.  The sum of indicative standard rated VAT on the value of purchases and consumables from 17 November 1999 to 30 November 2001 eligible for VAT credit  would have been £452,035. The sum of indicative VAT broadly corresponded with the actual amount of input tax claimed, £431,628, by Selbix Joinery during this period. 
14.	  On 21 May 2002 Selbix Joinery Limited called a meeting of creditors to consider a voluntary arrangement under which the preferential creditors would receive 100 pence in the pound, and the non-preferential creditors a dividend of 37.6 pence in the pound. On the 27 May 2002 the Inland Revenue and Customs and Excise proposed an amendment to the voluntary arrangement which was not accepted by the directors of Selbix Joinery Limited with the result that the company was made insolvent on 10 July 2002. 
15.	The amount of £79,663.05 due to the Respondents in the liquidation proceedings of Selbix Joinery Limited bore no relationship to the sum of monies claimed by the Appellant in its voluntary disclosure.  
16.	The directors of Selbix Joinery Limited were also directors of the Appellant. Mr A was the accountant for both companies. The accountant and the directors authorised the entering of the disputed supplies in the accounts of Selbix Joinery Limited and the related claims for input tax.
The Voluntary Disclosure
17.	On 26 June 2002 Mr A submitted a VAT return for the period ending 31 May 2002 on behalf of the Appellant with attached schedules of items not previously claimed on previous returns. The cost of the items not previously claimed was £134,046.45. Mr A explained that the items had been processed through the accounting function of a subsidiary company even though the invoices were addressed to the Appellant. 
18.	The schedules contained summary details of purchases from 1 March 2001 to 30 April 2002 which were extracted from the Selbix Purchase Ledger VAT Transactions on Joinery. 
19.	According to Mr A, he took the action of incorporating the under-claim in the May 2002 VAT return on the advice of the Respondents’ helpline. The bundle of documents contained one record of a contact centre enquiry from the Appellant dated 14 August 2002 where Mr A enquired about the procedure for correcting errors on a VAT return which amounted to £130,000. He was advised to submit a voluntary disclosure. 
20.	Mr A’s submission of a VAT return incorporating a retrospective input tax claim did not conform with the requirements for a voluntary disclosure. Also Mr A omitted to mention that Selbix Joinery Limited was in financial difficulties and in imminent prospect of liquidation. 
21.	On 14 August 2002 Mr A sent a further letter to the Respondents reminding them that they had not dealt with the May 2002 VAT return. 
22.	On the 7 October 2002 the Respondents stated that they had tried to contact Mr A on several occasions but without success. They informed Mr A that they would treat his letter of 14 August 2002 as a voluntary disclosure. Also on the 7 October 2002 Mr Bruce visited the Appellant and carried out an inspection of the Appellant’s VAT accounts.  On 14 February 2003 the Respondents formally rejected the Appellant’s voluntary disclosure.
Appellant’s Representations
23.	 The Appellant submitted that the supplies detailed in the voluntary disclosure were made to it for the purposes of its business. Thus the Appellant was entitled to recover the VAT on those supplies. In support of its submission the Appellant relied on the following facts:
(1)	 The Appellant placed the orders for the materials on its official letterhead stationary.
(2)	 The materials were supplied to the Appellant under terms and conditions which the Appellant, not Selbix Joinery Limited, had agreed with the suppliers. The Appellant was required to honour the invoices after the liquidation of Selbix Joinery Limited.
(3)	The invoices for the materials were made out to the Appellant.
(4)	The materials were used in the manufacture of goods for the sole supply to the Appellant. 
24.	The Appellant considered irrelevant the Respondents’ concern about the voluntary disclosure and the liquidation of Selbix Joinery Limited occurring at the same time. The Appellant explained that the error came to light during the consultation with the insolvency practitioner when it was identified that Selbix Joinery Limited had been wrongly claiming input tax properly due to the Appellant.  The Appellant pointed out that the directors of Selbix Joinery Limited had every intention of continuing trading under the terms of the creditors’ voluntary arrangement which would have guaranteed 100 pence in the pound dividend to preferential creditors. However, the Respondents did not accept the terms of the arrangement which forced Sellbix Joinery into liquidation. Further had the Respondents acted quickly after the submission of the voluntary disclosure they would have been able to recover the VAT wrongly claimed by Selbix Joinery Limited under the liquidation as preferential creditors. Finally the Appellant did not benefit from the timing of the liquidation of Selbix Joinery Limited. The Appellant wrote off a debt of £122,725 owed by Selbix Joinery Limited in its accounts ending 30 November 2002. 
25.	The Appellant disputed the Respondents’ contention that the costs of the materials had been incorporated in the accounts of Selbix Joinery Limited. The Appellant pointed out that its historic ratio of costs of materials to in house manufactured sales was about 23.5 per cent, and currently at 27.75 per cent. The ratio, however, was 32.67 per cent and 38.49 per cent for the years ending 30 November 2001 and 30 November 2002. The Appellant considered that the higher ratio in the two years when Selbix Joinery Limited was trading indicated that the Appellant incurred significant purchases which were not used in its own in-house manufacture but rather were free-issued to a sub-contracted manufacturer. 
26.	The Appellant considered that its accounts and those of Selbix Joinery Limited for 2001 and 2002 were in a mess. There was evidence of double counting and an element of arbitrariness within the accounts.  The Appellant dismissed Mr A in 2004. As part of the due diligence exercise for the change in the majority ownership in 2006, auditors certified that the amount claimed in the voluntary disclosure was properly due to the Appellant.  
The Respondents’ Representations
27.	The Respondents submitted that the Appellant and Selbix Joinery Limited were two separate companies with different business addresses and purposes, and separate bank accounts. The supplies of materials were delivered directly to the business premises of Selbix Joinery Limited and used by it to manufacture products which were later sold to the Appellant. Selbix Joinery Limited paid for the materials from its bank account. 
28.	The Respondents refuted the Appellant’s claim that Selbix Joinery Limited had mistakenly claimed the input tax. The Respondents pointed out that Mr A acted as accountant for both the Appellant and Selbix Joinery Limited. He was responsible for keeping the accounts for the two companies. Further the two directors of Selbix Joinery were directors for the Appellant. In those circumstances the Tribunal was entitled to infer that the recording of the disputed purchases in the accounts of Selbix Joinery Limited and the related input tax claims were properly authorised and made for correct purposes, namely the supplies were made to Selbix Joinery Limited. The force of the Respondents’ submission was given additional weight by the fact that the Respondents contacted Selbix Joinery Limited on three separate occasions prior to the voluntary disclosure to query repayment returns. On each occasion Selbix Joinery Limited confirmed the validity of the repayments because input tax had been incurred on the purchase of goods and materials. 
29.	The Respondents considered the Appellant’s submission about keeping Selbix Joinery Limited in funds irrelevant because the materials were paid for from the bank account of Selbix Joinery Limited. The Appellant’s assertion that it held the lease of the business premises for Selbix Joinery Limited was, in the Respondents’ view, of no significance since the materials were delivered to the premises from where Selbix Joinery Limited operated its business. The Respondents submitted that the Appellant  adduced no evidence that it used the materials for the purposes of its business. Further the Appellant did not dispute the reason why it was named on the invoices for the materials ordered for Selbix Joinery Limited, namely, that the Appellant could obtain credit facilities from suppliers which were denied to Selbix Joinery Limited, being a new company.
30.	The Respondents contended that the Appellant advanced the alternative use of the materials for its business only when Selbix Joinery Limited was in imminent prospect of liquidation. This meant that the Respondents were unable to recover the VAT repayments to Selbix Joinery Limited. In the Respondents’ view the timing of the Appellant’s voluntary disclosure cast considerable doubt on the credibility of its claim  for recovery of input tax.
31.	The Respondents concluded that the evidence in this case supported their contention that the supply of materials had been made to Selbix Joinery Limited for the purpose of its business and that their refusal of the Appellant’s voluntary disclosure was correct. 
Reasons for Decision
32.	Section 24 of the VAT Act 1994 entitles a taxable person to a VAT credit on supplies of goods and service made to him provided the goods and services supplied are used or to be used for the purpose of any business carried on by him.
33.	The Appellant asserted that the disputed supplies of materials detailed in its voluntary disclosure were made to it for the purposes of its business. The Respondents contended that the supplies were made to Selbix Joinery Limited and used in its manufacture of goods which were then sold onto the Appellant.
34.	The central issue for the Tribunal to determine was whether the disputed supplies were made to the Appellant or to Selbix Joinery Limited. The Appellant bore the burden of establishing on the balance of probabilities that the supplies were made to it for the purpose of its business.
35.	The Appellant did not call as witnesses the directors and the accountant who were responsible for the businesses of the Appellant and Selbix Joinery Limited at the time the disputed supplies were made. There was no direct evidence from the responsible participants about why Selbix Joinery Limited claimed the VAT on the disputed supplies rather than the Appellant.  The Appellant’s case, therefore, depended upon the current directors’ interpretation of events and documents to which they were not parties.
36.	The Appellant relied on facts that the invoices for disputed supplies were made out to the Appellant, and that it funded the purchases of the materials via the bank account of Selbix Joinery Limited.  The Appellant supported its case by an analysis of its ratio of costs of materials to in house manufactured sales which was higher in its 2001 and 2002 accounts than in other years suggesting that the Appellant used the materials for its business. 
37.	We find the Appellant’s case flawed. Essentially if the current directors’ interpretation of events was correct, there would be no justification for Selbix Joinery Limited to operate as a separate company with its own business. The implication of the Appellant’s voluntary disclosure was that from March 2001 Selbix Joinery Limited purchased no materials for its business. Further the Appellant’s reliance on the current directors’ reconstruction of past events was of limited evidential value and incapable of challenging the contemporaneous records of how Selbix Joinery Limited conducted its business. Finally the timing of the voluntary disclosure coinciding with the imminent liquidation of Selbix Joinery Limited  which was not mentioned  in the letter accompanying the May 2002 VAT return cast significant doubt on the bona fides of the disclosure.
38.	We placed weight on the fact that the Appellant formed Selbix Joinery Limited as a separate company for the purpose of manufacturing joinery products. We considered that the 2000 and 2001 accounts for Selbix Joinery Limited accurately described its modus operandi, which was that it purchased its own materials and sold goods to the Appellant. The transfer of monies from the Appellant to Selbix Joinery Limited represented the consideration paid for the joinery products. We found that Selbix Joinery Limited manufactured products on a long term roll-out basis for the Appellant and held the goods until the Appellant required them for their business. This indicated that Selbix Joinery Limited determined its own requirements for materials rather than waiting for specific orders from the Appellant, as was suggested by the current directors. We accepted Mr Bruce’s evidence that the disputed supplies were delivered directly to the business premises of Selbix Joinery Limited in Norwich. The fact that the Appellant held the superior interest in those premises or even a presence there carried no weight because the Appellant produced no evidence that it actually carried out its business from the Norwich premises.
39.	We were not persuaded by the Appellant’s submissions about the significance of the Appellant using its letterhead stationary to order the disputed supplies which were then invoiced to the Appellant. We accepted Mr A’s explanation that the Appellant took these steps to secure credit terms for Selbix Joinery Limited with its suppliers, which otherwise would not have been available to Selbix Joinery Limited, being a newly created company. We consider Mr A’s explanation critically undermined the evidential value placed by the Appellant on the orders and invoices for the disputed materials.
40.	We were not convinced with the Appellant’s analysis of the cost of materials ratios. The Appellant’s inference from the analysis that it had incurred significant purchases which were not used in its own in-house manufacture but rather were free-issued to a sub-contract manufacturer was meaningless without a corresponding analysis of who claimed the input tax on the significant purchases, and whether the invoices for those purchases were included in the voluntary disclosure. We found Mr Bruce’s analysis of the indicative standard rated VAT for the value of purchases and consumables for Selbix Joinery Limited more compelling. His analysis demonstrated that the actual amount of input tax claimed by Selbix Joinery Limited broadly corresponded with the indicative VAT, from which we concluded that Selbix Joinery had correctly claimed the VAT on the disputed supplies.   
41.	We heard no evidence from the directors and the accountant who authorised the input tax claims on behalf of Selbix Joinery Limited in respect of the disputed supplies. The accountant and the directors of Selbix Joinery Limited held the same positions with the Appellant. In view of the commonality of personnel between the two companies we infer that the directors and the accountant knew which supplies were made to respective companies. The fact that they sanctioned the reclaims by Selbix Joinery Limited of the VAT incurred on the disputed supplies was compelling evidence that those supplies were made to Selbix Joinery for the purposes of its business. The validity of this conclusion was supported by the assurances given by Selbix Joinery Limited to the Respondents on three separate occasions prior to the voluntary disclosure that it was entitled to the input tax on the invoices issued to the Appellant.  The possibility that the directors and the accountant had mistakenly allocated the disputed supplies to the accounts for Selbix Joinery Limited only arose after the company got into financial difficulties and in imminent danger of liquidation. The timing of the voluntary disclosure with the liquidation proceedings challenged the credibility of the Appellant’s submission that Selbix Joinery Limited was not entitled to the input tax on the disputed supplies. The timing raised the spectre that the allegations of mistake were a convenient way of ameliorating the financial position of the Appellant following the liquidation of its subsidiary company 
Decision
42.	The Appellant has failed to satisfy us on the balance of probabilities that the disputed supplies were made to it for the purposes of its business. We find that the facts overwhelmingly support the conclusion that the disputed supplies of materials were made to Selbix Joinery Limited for its manufacturing business. Thus Selbix Joinery Limited correctly claimed the VAT on the disputed supplies. We, therefore, uphold the Respondents’ decision to refuse the Appellant’s voluntary disclosure and dismiss the Appeal. We make no order for costs.    

            

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 30 November 2007

LON/2006/1120